This interview focuses on the strange-sounding "virtual" currency of Bitcoin and how a fund is trying to tap investor hunger for alternatives to state, "fiat" currencies in a world of central bank money printing.

Editor's
note: While this report comes from Malta, the Mediterranean island, the issues at stake here are global in significance, so this publication is reprinting this item from sister website WealthBriefing as it may be of interest to Asia-based readers.

As pretty much anyone in the wealth management industry
knows - or should know - the basic requirement of any client is to preserve
wealth. With the “financial repression” of negative interest rates, people have
turned to gold, real estate, certain equities and esoteric fields such as
fine art to do the job.

All these asset classes have drawbacks, however. Even gold,
to take Man’s oldest safe haven asset, is not bullet-proof, as shown when
President Franklin D Roosevelt confiscated private gold holdings in the 1930s.
With that sort of drastic event in mind, today’s digital economy has come up
with “Bitcoin”, a form of electronic, or virtual, money that is, its supporters
claim, designed to replicate the scarcity of metal currencies without the tricky
physical storage and handling issues. It has made headlines with a number of giddy
price gyrations; it has also prompted worries from some commentators and
regulators as to whether it could be misused by criminals. Bank of Singapore’s
chief economist, Richard Jerram, for example, recently doubted whether Bitcoin
will challenge global monetary systems. In May, US police froze the accounts of
Mt Gox, the world's largest Bitcoin exchange, after claiming it was operating
as an "unlicensed money service business." Bitcoin is controversial.

Last autumn, a Malta-headquartered "next generation brokerage company", Exante, launched the Malta-registered Bitcoin
Fund enabling high net worth investors, among others, to hold units in Bitcoins.
It is the first fund of its kind in the world. Gatis Eglitis, managing partner
of Exante (Malta),
told this publication about the fund when WealthBriefing visited his firm’s offices in St Julian’s on the Mediterranean island
recently. (The firm has recently held its inaugural awards ceremony in Lisbon, Portugal.)

The decision to launch the fund was made because “we wanted
to include Bitcoin in our multi-asset trading platform, but because it was not
considered to be a real asset like stocks or futures. Being a regulated entity
we had to think about the institutionalisation of it. Thus we came up with an
idea to wrap Bitcoin within a hedge fund form and offer them to our customers
electronically on Exante's multi-asset platform with one click,” he said.  

Eglitis said the fund was considered as investment in
technology and the technology has proven to be robust enough, having been
around for three years. “We set up Exante to service our brokerage clients that
would like to invest in FX, metals, futures, stocks, forwards, options, bonds,
hedge funds and other financial products - all from one electronic online
trading platform - from one account. Bitcoin fund was set up more like a
project to expand our product offering,” he said.

Clearly, with concerns about central bank quantitative
easing – in other words, money printing – the timing of the launch of such a
fund is interesting. Despite recent pullbacks, the decade-long ascent of gold,
for example, is ample proof of how concerned many investors have been about the
eroding value of mainstream fiat currencies. (Since the gold link to the dollar
was severed by Richard Nixon in 1971, the US currency has lost more than 80
per cent of its purchasing power.)

“For the last decade wealth preservation when working with HNW individuals has been a really hot topic. This is the reality,”
Eglitis continued.

“We are very vulnerable in the world today,” he said,
talking about the still-fragile nature of many banks’ balance sheets, high
debts, and the worries about mainstream monetary systems. “The slightest
problems happen and our security is gone,” Eglitis
said. 

What is Bitcoin?

Bitcoin is seen as an inelastic type of money as its
quantity cannot be indefinitely increased. According to one description at Wikipedia,
Bitcoin “is a digital currency first described in a 2008 paper by pseudonymous
developer Satoshi Nakamoto, who called it a peer-to-peer, electronic cash
system.”

The creation and exchange of Bitcoin is based on an
open-source cryptographic protocol and is not managed by any central
authority - the latter fact being something that might frighten
politicians (possibly not
a bad thing). Each Bitcoin is subdivided down to eight decimal places,
forming
100 million smaller units called satoshis. Bitcoin can be transferred
through a
computer or smartphone without an intermediate financial institution
such as a
bank. Again, such features, while now part of our electronic lives, have
prompted calls by regulators such as in the US to impose oversight.

Using an analogy with the language of the gold market,
Bitcoin processing is secured by servers called “Bitcoin miners”. These servers
communicate over an internet-based network and confirm transactions by adding
them to a ledger which is updated and archived periodically. Each new ledger
update creates some newly-minted Bitcoin; a crucial feature is that the number
of new Bitcoin units or “Bitcoins” created in each update is halved every four
years until the year 2140 when this number will decline to zero. After that time
no more Bitcoins will be created - the total number of Bitcoins will have
reached a maximum of 21 million Bitcoins. That, at least, is the theory.

Eglitis and colleagues list out other benefits of Bitcoin:
it does not need to be protected in big, costly-to-guard vaults; it can be
transferred around the world in seconds (unlike physical gold); it does not
need verifications to show authenticity, whereas gold has to be tested
physically; Bitcoin has eight digits on the right side of the comma, so it can
service small payments, whereas one would need gold dust to do so, which is
often impractical. Finally, Exante says, all transactions of Bitcoin can be
audited online in real time so that all system members know exactly how many
coins exist, whereas gold requires participants to use third-party auditors.

The fund

The fund works in the following way: The hedge fund is like
an exchange traded fund where one fund unit is equivalent to one Bitcoin -
there is no speculation in the fund – and its purpose is to maintain the
equilibrium of one unit per one Bitcoin. The fund is exclusively traded on
Exante’s multi-asset platform and cannot be bought anywhere else. The reason
for the fund is to give institutions and private individuals access to Bitcoin
in a financial instrument form.

Interestingly, the fund levies no annual management or
performance haircut – unlike most hedge funds. Instead, there is a 0.5 per cent
entry and exit fee, and a "safekeeping" fee of 1.75 per cent per year.

So far, there have been no redemptions of Bitcoin assets
from the fund, Eglitis said. The fund is a long-only vehicle – there is no
shorting involved.

Exante and Malta

The firm is an example of how Malta, once a UK colony and
military base and now an independent, European Union member state, is playing
host to alternative investment fund vehicles, wealth managers and other
financial services firms. Exante was created in 2012. Its main software
development office, meanwhile, is in Moscow, and
it has offices in Singapore
and St Petersburg, Russia. It aims to soon open an
office in London.

There is more to Exante than Bitcoin. The main focus of the
business is prime brokerage with a strong emphasis on technology. The partners
at the firm have a blend of financial, science and technology experience. Eglitis,
for example, has worked as an institutional sales trader and later as an institutional
business sales manager in Saxo Bank, among other firms. Anatoliy Knyazev is the
managing partner of Exante (Malta),
qualifying as a mathematician and systems programmer. Among his roles was that
of director in Global Hedge Capital Group, participating in projects for the
design of systems and applications for tick market data visualisation and its
analysis. Another partner is Alexey Kirienko.

Outlook

So how does Eglitis predict the Bitcoin market will develop?

He expects it to get larger; Eglitis also expects that some
regulators and other government bodies will try and increase oversight and
control, albeit with limited success.

At the heart of the issue, he said, is that Bitcoin
challenges many of the assumptions - which he likens to “religions” - that many
economists and policymakers have about how the economic world works.

“We have a lot of religions in the world and we have a lot
of different economic belief systems out there – Keynesianism, Monetarism, and
others. We are hard scientists…we see causes and consequences and work on analysing
the facts as they are,” he said.

“We see that current global liquidity management is not
working as it has been designed to do. What monetary tools do central banks
have when inflation is created by themselves while economies are stagnating?”
he said.  

He said the “Austrian” school of economics - with its
liberal approach to interest rates and tradition of supporting a monetary system backed
by some scarce product - is probably the closest to Exante’s thinking and the
case for Bitcoin, he said. (For more on the “Austrian" approach to money and
banking, click here.)

Eglitis also answers those who might fear that Bitcoin could
be misused by criminals, such as money launderers, or just not gain critical
mass. “I am not saying that criminals are not using it, but I would argue that
it is probably not the best way of making transactions for criminals, because
it would disclose many tracks for investigators when or if wallet identification
linked with its owner. Bitcoin holders do enjoy anonymity, until their wallet
is linked with them,” he said.

Recent market shifts – there have been some dramatic price
gyrations – have so far not deterred Exante’s clients from holding Bitcoins,
Eglitis added. In fact, some early turbulence is probably a good test of how
robust this nascent currency will be.

For as Eglitis and his business partners would suggest,
people scoffed in the early days of the internet when some suggested it
would
revolutionise business, social and cultural life. They are not scoffing
any longer. With all predictions, a good deal of caution is in order,
but for the
moment at least, Bitcoin is not going away.